Walmart WMT Might Be Thinking Small On Store Size

Apr 29, 2010, 2:13 am EDT | By Paul Ausick

Walmart WMT Might Be Thinking Small On Store Size

At last week’s release of its 2009 annual report, Wal-Mart Stores Inc. (WMT) indicated that it might change direction and “develop new, innovative formats.” Company president/CEO Mike Duke especially noted opportunities in major metropolitan markets as a target for the new formats.

Walmart has run into oppostion from community groups, small businesses, and, particularly, unions when it has tried to expand into large metropolitan markets. It has failed twice to get a super-center into either Queens or Staten Island in New York City, but is reported to be looking at a shopping center in Brooklyn.

Walmart’s returns have flattened out, and even though the retailer picked up customers during the economic recession, it is already having trouble keeping these new customers in its stores as the economy improves. The company recently dropped prices on some 10,000 items in an effort to retain its new-found friends.

The company’s strategy has historically been to locate its stores in areas that serve a regional customer base that lives within 30 miles or so from the store. That is not a strategy that translates well to densely populated urban centers where even if the 20 acres or so that a super-center needs were available, the cost of the land alone might be prohibitive. To say nothing of increased traffic and the ability of surface streets to handle the thousands of cars that a new store would attract.

If the company wants to get a toe-hold in New York City or Chicago, it is very likely going to have to think smaller. There are several ways Wal-Mart could enter a large urban center.

First, Wal-Mart has had some success with its trial Supermercado de Wal-Mart stores in Houston and Phoenix which are aimed at the large Hispanic populations in those cities. That concept could be expanded to other urban areas, but so far the only time the company tried that it didn’t work.

However, Wal-Mart faces stiff competition with other grocery retailers that are already moving into this space. And with grocery margins as thin as they are, Wal-Mart would have to execute this almost perfectly right out of the chute.

Another possibility would be for Wal-Mart to open a series of locations in urban locations where customers could pick up items that they had ordered on the company’s web site. The store would not have to be very large, and it could offer a limited amount of merchandise for sale directly. The most likely suspect would be electronics.

Wal-Mart has put on a concerted push to increase its electronics sales, and offering TVs, DVRs, PCs, and other electronic gadgets has the advantage of better margins than are available on a lot of other things that Wal-Mart could put in these stores. Staffing could be minimal, and store hours could be limited. Deliveries of items ordered over the web could be handled by a contract service or other carrier. And given Wal-Mart’s well-known habit of wringing every last dime out of its vendors, the cost of this could also be kept manageable.

A third possibility is really a variation of the second. But an existing retail chain, say Radio Shack Corp. (RSH), which operates nearly 4,500 retail stores in the US. Radio Shack has a market cap of about $2.8 billion which Wal-Mart could easily manage with its $8 billion hoard of cash. Radio Shack earnings recently showed a 4% increase in sales.

Radio Shack is moving away from the gadget business and into the smartphone/cell phone business and that too could work in Wal-Mart’s favor if it chose to keep the Radio Shack brand.

Wal-Mart has to do something to juice up its returns. It’s a dead-money stock otherwise.